Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/70694
Authors: 
Bianchi, Javier
Year of Publication: 
2009
Series/Report no.: 
Working Paper, Federal Reserve Bank of Atlanta 2009-24
Abstract: 
Credit constraints that link a private agent’s debt to market-determined prices embody a credit externality that drives a wedge between competitive and constrained socially optimal equilibria, inducing private agents to overborrow. The externality arises because agents fail to internalize the debt-deflation effects of additional borrowing when negative income shocks trigger the credit constraint. We quantify the effects of this inefficiency in a two-sector dynamic stochastic general equilibrium model of a small open economy calibrated to emerging markets. The credit externality increases the probability of financial crises by a factor of seven and causes the maximum drop in consumption to increase by 10 percentage points.
Subjects: 
financial crises
amplification effects
business cycles
constrained efficiency
JEL: 
D62
E32
E44
F32
F41
Document Type: 
Working Paper

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